Everyone wants to know what the next hot stock will be. What they all fail to realize is that investing isn’t about picking the right stocks at the right time. Investing isn’t sexy like those jerks on Wall Street portray it — in fact if you want to lose lots of money very quickly you have two choices: go to Las Vegas or invest in the “hot stocks” on the street.

The vast majority of my investment portfolio is tied up in mutual funds. I have, at most, 5% of my investments tied up in individual stocks. Why? Because picking stocks is risky and (if you’re going to do it the right way) requires a significant time investment. I prefer to use my time for projects that are guaranteed to provide me with a return (monetarily or otherwise), not those that are almost guaranteed to lose me money!

How can Mutual Funds help you?

“A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.^[1]“

The Wikipedia definition is a great way to describe what a mutual fund is, but its definition isn’t really important. What is important is that you know how to make mutual funds work for you. After all most of us could care less what a mutual fund is. We only care about how they can help us build wealth.

Here’s the bottom line: Investing in mutual funds will help you build wealth and become financially independent.

How do I get started investing in Mutual Funds?

You’ve got two choices when it comes to investing in mutual funds. Manage them yourself or have a “professional” do it.

Either of these choices is better than doing nothing at all (or leaving your money in a savings account and calling it an investment — high yield or not it’s stupid if you’re younger than 40). My advice? Manage it yourself. It’s easy and will require a few hours a year of your time at most. If you are too nervous to do it yourself then find yourself a financial adviser. If you’re military (or inherited your membership from someone who is) you could also call USAA for free financial advice. If you’re comfortable with managing it yourself read on.

Here’s what you do to start investing in mutual funds:

1. Choose a fund with Vanguard or T Rowe Price (choose an index or target fund).
2. Set up automatic investing (take it right out of your paycheck if possible).
3. Watch your money grow (but don’t check your balances too often).

The Bottom Line

Putting your money to work for you is how the poor get rich and the rich keep getting richer. Most of us don’t have the time or dedication to spend hours every single week (or month for that matter) researching stocks, transferring money to investments or even paying bills. The bottom line is that you need to invest, you should invest in mutual funds and you need to automate your investing.

Do this and you’ll really start to build wealth. Keep it up and you’ll make it into the Million Dollar Club in no time.

I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in – you guessed it – income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com